Enhancing China-specific disclosures: Important guidance for companies

Jul 28, 2023
Audit Financial reporting SEC matters

In today's global business landscape, companies operating in or based in China face unique disclosure obligations. To provide investors with the information they need for informed decision-making, the Securities and Exchange Commission’s Division of Corporation Finance has issued crucial guidance.

The Division of Corporation Finance stresses the need for companies to provide more prominent and tailored disclosures specifically pertaining to China-related matters. This ensures that investors possess vital information to facilitate well-informed investment and voting decisions. Below are the three key areas companies should focus on to enhance their China-specific disclosures:

  1. Compliance with the Holding Foreign Companies Accountable Act (HFCAA): Under the HFCAA, companies designated as Commission-Identified Issuers (CIIs) must ensure compliance with rigorous submission and disclosure requirements. This includes disclosing the percentage of shares owned by foreign government entities, identifying Chinese Communist Party (CCP) officials on the board or within operating entities, and disclosing any CCP-related provisions in the company's articles of incorporation or equivalent organizing documents.
  2. Specific disclosure of material risks related to the Chinese government's role: Companies are urged to provide more specific and prominent disclosures concerning the material risks associated with the Chinese government's intervention or control in their business operations. This extends beyond traditional definitions of control, encompassing factors such as the power to influence management and policies through various means, including ownership of voting securities, contractual arrangements, or other mechanisms.
  3. Disclosure of material impacts of relevant statutes: Companies should evaluate and disclose any material impacts resulting from relevant statutes, with a specific focus on the Uyghur Forced Labor Prevention Act (UFLPA). This act prohibits the import of goods from the Xinjiang Uyghur Autonomous Region in China. Evaluating and disclosing potential compliance risks or disruptions in the supply chain arising from operations in this region is crucial for maintaining transparency and addressing investor concerns.

By proactively addressing these disclosure obligations, companies can ensure compliance with regulatory requirements and provide investors with the necessary information to make informed investment and voting decisions. It is imperative for companies operating in or based in China to review the guidance provided by the Division of Corporation Finance and tailor their disclosures accordingly. By doing so, companies can uphold transparency, foster trust, and mitigate potential risks associated with operating in the Chinese market.

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